Sears Plans to Spin Off Lands’ End to Shareholders

Lauren Coleman-Lochner and Cotten Timberlake

December 6, 2013, 4:21 PM EST

Sears Holdings Corp. plans to spin off its Lands’ End Inc. unit, giving investors a piece of a profitable clothing brand amid almost nine years of market-lagging returns for the department-store chain’s shares.

The distribution is subject to the approval of the board and other conditions, Hoffman Estates, Illinois-based Sears said today in a statement. The unit’s registration filed with the Securities and Exchange Commission today didn’t say how many Lands’ End shares Sears investors would receive.

Edward Lampert, Sears’s chairman, chief executive officer and largest shareholder, is breaking off for investors a unit that has remained profitable while the department-store chain started losing money. Sears shares slid about 57 percent since March, 28, 2005, when Lampert merged Kmart Holding Corp. and Sears, Roebuck & Co., through yesterday, while the Standard & Poor’s 500 Index rose 52 percent in that time.

“It’s a good thing for shareholders,” Robert Passikoff, president of consultant Brand Keys in New York, said in a phone interview today. “Land’s End, the brand itself, was weakened by its association with Sears. Folks see Sears as being more downscale, cheaper. Land’s End could regain some of its brand shine by being off on its own.”

Sears fell 3.8 percent to $48.09 at the close in New York after rising as much as 4 percent earlier in the day.

Lands’ End, founded in 1963 and acquired by Sears in June 2002 for about $1.9 billion, said in its registration statement that it had net income of $49.8 million on revenue of $1.6 billion in its fiscal 2012.

Profit Falls

While that performance is better than Sears’s $930 million loss last year, Lands’ End’s net income has dropped 63 percent since 2008 as revenue slid 4.2 percent.

Sears had been hoping to develop a more upscale customer base with the acquisition of Land’s End, said Steven Dennis, who worked at Sears from 1991 to 2003 and spearheaded the Lands’ End acquisition and integration in 2002 and 2003. Lampert didn’t continue that strategy, he said.

“In the short-term, having that Sears store volume will be important to Land’s End,” said Dennis, who now runs Dallas-based SageBerry Consulting LLC, which he founded. “In the long-term, if I were running Land’s End, I would look for alternative retail partners that are stronger and that would be a better fit for my brand, whether that is someone like Macy’s or opening your own stores.”

Edgar O. Huber, who has been CEO of Lands’ End since August 2011, is expected to continue in that role, according to today’s filing.

Lampert Spinoffs

Lampert has been selling and spinning off Sears assets as 27 straight quarterly sales declines sap Sears’s cash pile. Sears said in October it was considering separating Lands’ End and its auto center unit. Lampert spun off Sears Hometown & Outlet Stores Inc. last year in a move that raised $346.5 million from a rights offering, and a $100 million cash dividend paid by Hometown.

Sears said today that it expects the Lands’ End spinoff to be a tax-free distribution to shareholders and didn’t mention a dividend for Sears.

The retailer still could structure the spinoff to include a payout to the parent company or to investors, said Mary Ross-Gilbert, an analyst at Imperial Capital LLC in Los Angeles. Sears could issue $100 million to $300 million in debt to fund such a payout, she said.

“While this is favorable to the shareholders, it’s detrimental to the creditors,” Gilbert said. “As they sell off or spin off these profitable businesses, these cash-generating businesses, you’re left with higher losses at Sears.”

Bonds Fall

Sears Holdings’ $1.23 billion of 6.625 percent bonds maturing in October 2018 fell 0.25 cent to 92.75 cents on the dollar at 12:50 p.m. today in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds now yield 8.48 percent, higher than any close since June.

The cost to protect $10 million of Sears Roebuck Acceptance Corp. debt from default for five years rose 1.7 basis points to 18.45 basis points upfront, according to data provider CMA, which is owned by McGraw-Hill Cos and compiles prices quoted by dealers in the privately negotiated market. That means investors would pay $1.85 million initially and $500,000 annually.

The swaps, which typically climb as investor confidence deteriorates, pay the buyer face value if Sears fails to meet its obligations, less the value of the defaulted debt.

Cash Balance

The retailer said last month that it had $607 million in cash as of Nov. 2 and that it expects to generate $2 billion of liquidity in the current fiscal year, up from an earlier forecast of $500 million.

The company has been struggling since the merger of Kmart and Sears. The retailer’s dwindling resources are making it harder for Sears to improve the almost 2,500 outdated stores that have contributed to its loss of customers.

Separating businesses allows Sears to “become a more focused company that is easier to understand and manage,” the retailer said in an online slide presentation last month.

Sears last month said its third-quarter net loss widened to $534 million, or $5.03 a share, from $498 million, or $4.70, its sixth consecutive loss.

Lampert cut his stake in the company below 50 percent this month to meet redemption requests from his hedge-fund clients.

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